The value of iron ore and timber in Sweden

Transcription

1 The value of iron ore and timber in Sweden An ex post study of the United Nations valuation framework for green national accounts Sandra Nordmark Josefin Wallgren Business and Economics, masters level 2017 Luleå University of Technology Department of Business Administration, Technology and Social Sciences

2 THE VALUE OF IRON ORE AND TIMBER IN SWEDEN - An ex post study of the United Nations valuation framework for green national accounts Master Thesis 2017 Sandra Nordmark Josefin Wallgren Supervisor Jesper Stage Master of Science in Business and Economics (Civilekonom) Business and Economics Luleå University of Technology Department of Business Administration, Technology and Social Sciences

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4 ABSTRACT Green national accounts are a complement to the more traditional GDP measure which includes natural capital and the depreciation and regeneration of natural capital. The United Nations have developed an international standard model, the System of Environmental-Economic Accounting, for valuing natural resources within the green national accounts. The method is based on forecasts of future streams of expected incomes from the resource. This study aims to find out whether the valuation method used to forecast future incomes from iron ore and timber according to the international standard is consistent with the actual outcomes. In Sweden, previous studies have been made to develop green national accounts from the 1800s onward. By using the United Nations current and previous valuation methods and performing calculations on historical resource rents it is possible to evaluate how well the methods can estimate true future values. This study shows that both valuation methods systematically misestimate the future income streams from both resources. Keywords: Green national accounting, SEEA, natural resources, valuation, timber, iron ore, net present value, net price

5 SAMMANFATTNING Gröna nationalräkenskaper är ett komplement till det mer traditionella BNP-måttet som även tar hänsyn till bland annat naturkapitalet och dess förslitning. FN har utvecklat en internationell standardmodell för gröna nationalräkenskaper, System of Environmental-Economic Accounting (SEEA), där en rekommenderad värderingsmetod för naturkapital finns angiven. Värderingsmetoden är baserad på framtida, förväntade, inkomstflöden från naturresursen. Den här studiens syfte är att ta reda på om värderingsmetoden för att förutse framtida intäkter för järnmalm och skog enligt den internationella standarden stämmer överens med de faktiska utfallen. I Sverige har tidigare studier gjorts för att utveckla gröna nationalräkenskaper från 1800-talet och framåt. Genom att använda FN:s nuvarande och tidigare rekommenderade värderingsmetoder för naturresurser och göra beräkningar på historiska vinster från naturresursen kan man se hur väl värderingsmetoderna fungerar i praktiken. Den här studien visar att bägge värderingsmetoderna systematiskt felskattar de framtida intäktsflödena från bägge resurser. Nyckelord: Gröna nationalräkenskaper, SEEA, naturresurser, värdering, timmer, järnmalm, nettonuvärde, nettopris

6 ACKNOWLEDGEMENTS We would like to express gratitude to our supervisor professor Jesper Stage who has been a great support to us during the progress with our master thesis, who has come up with valuable advice and shown a great commitment. We would also want to express a special thanks to professor Magnus Lindmark for all his help with the data used in this thesis.

7 TABLE OF CONTENTS CHAPTER 1 INTRODUCTION Background Problem description Purpose Research question Delimitations Methodology Outline... 4 CHAPTER 2 NATIONAL ACCOUNTING AND THE ENVIRONMENT: THEORETICAL MODELS The gross domestic product and green accounting Two kinds of resources Renewable resources Non-renewable resources The Hotelling rent Resource rent The residual value method Theory discussion CHAPTER 3 INTRODUCTION TO THE SYSTEM OF ENVIRONMENTAL ECONOMIC ACCOUNTING The System of National Accounts (SNA) Introduction to SEEA Previous literature Literature discussion Valuation methods for natural resources The net price method El Serafy method (User cost method) Net present value (NPV) method... 23

8 3.5 The theoretical SEEA method The theory behind the components in the model The formula CHAPTER 4 DATA Iron ore Timber Discount rate The consumption rate of interest (CRI) Data discussion CHAPTER 5 METHODOLOGY The GDP deflator The different methods The net price method The net present value method (NPV) The actual net present value (NPV) Percentage values Regression analysis using OLS CHAPTER 6 RESULTS AND ANALYSIS Results for timber Percentage analysis for timber Statistical regression analysis for timber Results for iron ore Percentage analysis for iron ore Statistical regression analysis for iron ore CHAPTER 7 DISCUSSION AND CONCLUSION REFERENCES... 74

9 LIST OF TABLES AND FIGURES Table 4.1 An excerpt with opening and closing stock 30 Table 4.2 Consumption rate of interest, Table 5.1 t-crit for different degrees of freedom 40 Table 6.1 The actual NPV, estimated NPV and net price estimate for timber 41 Table 6.2 The result in percent for timber 44 Table 6.3 The average result in percent for timber 46 Table 6.4 The regression analysis over 60 years for timber 47 Table 6.5 Regression analysis over the 40 first years for timber 48 Table 6.6 Regression analysis over the 40 last years for timber 50 Table 6.7 Regression analysis over the 20 first years for timber 51 Table 6.8 Regression analysis over the 20 middle years for timber 52 Table 6.9 Regression analysis over the 20 last years for timber 53 Table 6.10 The actual NPV, estimated NPV and net price estimate for iron ore 55 Table 6.11 Result in percent for iron ore 60 Table 6.12 The average result in percent for iron ore 61 Table 6.13 The average result in percent for iron ore, without zero-values 62 Table 6.14 Regression analysis over 60 years for iron ore 63 Table 6.15 Regression analysis over the 40 first years for iron ore 64 Table 6.16 Regression analysis over the 40 last years for iron ore 65 Table 6.17 Regression analysis over the 20 first years for iron ore 66 Table 6.18 Regression analysis over the 20 middle years for iron ore 68 Table 6.19 Regression analysis over the 20 last years for iron ore 69 Figure 4.1 Consumption rate of interest in Sweden 34 Figure 6.1 Diagram over actual NPV, estimated NPV and net price estimate for timber 43 Figure 6.2 Diagram over actual NPV, estimated NPV and net price estimate for iron ore 57 Figure 6.3 Diagram over actual NPV and estimated NPV for iron ore 58 Figure 6.4 Diagram over actual NPV and estimated NPV without the zero-value 59

10 CHAPTER 1 INTRODUCTION 1.1 Background The gross domestic product, GDP, is used to measure the value of all goods and services produced in a country over a certain time period, usually over one year. The GDP has been criticized for not including environmental damage, which occurs, among other things, from production, and for not including depletion of natural resources. Green national accounts are a complement to the original GDP and aims to include these factors. The importance of environmental damages and pollution were brought up in the Brundtland commission Our common future in 1987, which was written on behalf of the United Nations. It is said that this report was the first to establish the concept of sustainable development. (UNECE, 2016) After the Brundtland commission was released, many people reacted to it and hectic discussions started where the need for a change was obviously desirable. In 1993, the first draft of the System of Environmental-Economic Accounting (referred to as SEEA) was released. This system provides a method for valuing natural assets, in order to include them in the national accounting framework and help make economic policy more sustainable over time, and includes accounting procedures for several natural resources like timber, minerals and water (UNECE, 2005). The SEEA model came to be the international standard, which means that many countries are currently valuing their natural assets with that model. 1.2 Problem description The major issue with including natural resources in the national accounting framework is to value them correctly. The SEEA model aims of course to value the natural resources in a way that corresponds to reality as much as possible, to make correct estimations of 1

11 the actual outcome (i.e. what profits the resources will really generate in the future). However, the valuation method is based on a forecast of future profits from resources, which might not be completely correct. If the value should be wrong, it will lead to false numbers in the accounting. For example, when valuing non-renewable resources it is necessary to know the correct quantity of the resource to optimize the extraction over time. An increase in research and development will lead to improved technology, which makes it possible to find and extract more of the resources. If more resources are extracted, the first valuation is incorrect and the extraction was therefore not optimized. To be able to use the value of the natural resources in the best possible way it is important that they are valued properly. This study examines if the valuation methods currently used are good enough and how well they predict actual outcomes, which is something that has not been tested systematically before. 1.3 Purpose The purpose of this study is to examine how well the current and previous valuation methods used for natural resources in the SEEA predict the actual future income streams from iron ore and timber in Sweden. 1.4 Research question Does the System of Environmental-Economic Accounting central framework method and the formerly used net price method for predicting future incomes from natural resources match the true outcome? 1.5 Delimitations The study s geographical delimitation is Sweden and covers the time period from the 19th century until today. Sweden is chosen because of its unique historical data on natural resource use, which are not available for most other countries. The study applies solely to the valuation of timber and iron ore; no other kind of resource will be examined. The 2

12 choice of natural resources is based on the high relevance of those resources for Sweden, and also because of the quality of relevant data that exist for those resources. 1.6 Methodology In this thesis, we will analyse the values of natural resources estimated with the SEEA standard model. The stock values for timber and iron ore are calculated in Lindmark (1998) and so are the true resource rents from each year from 1830 until Three different time series are compared for each resource. The first is the actual net present value (NPV) where the true/known resource rent for every year in the dataset is used to determine what the actual future net present values were for each previous year. The second data series is the future net present values as predicted by the net present value method, the method currently recommended in the SEEA. The third data series is the future net present values as predicted by the net price method, the method previously recommended in the SEEA. Net prices were calculated by Magnus Lindmark (1998). The values from the NPV method and the net price method will be compared with the actual outcomes to see if either of the SEEA methods work well as valuation approaches and if there is a difference in how well they work. The results will be analysed with percentage values and a statistical regression analysis. Since the investigation is made on two different kinds of resources, there will be two separate calculations in the thesis. There will not be a comparison of results between the resources because they do not have any relevant connection and that would therefore be irrelevant for this study. 3

13 1.7 Outline The first chapter is an introduction and gives the background to the subject in this master thesis, with the problem description and purpose. In chapter two the theoretical models are presented, with explanations of GDP, resource rents, renewable and non-renewable resources and the Hotelling rule. Chapter three contains more information about the valuation models used in the SEEA, with previous literature about the subject with focus on historical literature before the SEEA framework came. Chapter four describes the data and chapter five describes the method in this study in more detail. Chapter six shows the results from the study. A discussion and conclusion about the study and its results are in the last chapter, seven. 4

14 CHAPTER 2 NATIONAL ACCOUNTING AND THE ENVIRONMENT: THEORETICAL MODELS In this chapter, we explain the main theoretical concepts in the SEEA model. The chapter begins with an introduction to the gross domestic product and green accounting, followed by an explanation about the resource rent, which is a central part in calculating the value of natural assets. We also explain the concept of the Hotelling rent, and end with a discussion about the concepts covered in the chapter. 2.1 The gross domestic product and green accounting The gross domestic product (GDP) measures all the goods and services produced in a country during a certain time period, usually s year. It can be measured as the sum of private consumption, investment, government consumption, and net exports. (Fregert & Jonung, 2010). Producing goods and services will give rise to depreciation of capital such as buildings and machines, but while the goods and services produced are shown in the GDP measure for production in the current year, the depreciation of capital is not. The problem of not considering these effects in the GDP measure long-term, is simply that the numbers can look a lot better than what the reality actually is. Because of this, there is a need for another measure that complements the original GDP with the cost of the capital depreciation following production. This measure is called net national product (NNP) and is simply the GDP minus the depreciation of capital. The NNP shows the long-term sustainable production level. (Ibid) Producing goods and services can also lead to negative external effects that affect the environment. For example, many factories have a lot of emissions causing pollution of air, water and land, which can cause a negative effect on the economy (Fregert & Jonung, 5

15 2010). The GDP measure has been criticized for its lack of consideration of the environmental effects and depreciation of natural capital (Hecht, 2007). In a wider, green, NNP measure it is also possible to measure the costs of environmental pollution and depreciation of natural capital. The latter is also referred to as green accounting. (Fregert & Jonung, 2010) Green accounting is, according to e.g. Lindmark (1994), important for assessing whether the economic activity within any country is sustainable or not in the long run. Since the 1980:s there has, therefore, been considerable work done to develop a system that takes these environmental impacts into account within the national accounts (Lindmark, 1994). This led to the United Nations SEEA report, the first version of which was published in 1993 and showed, for the first time, the relationship between the environment and the economy within the national accounting framework (United Nations, 2012). The United Nations has developed frameworks over the years for valuing GDP, NNP and green NNP. The valuation of natural resources in the green national accounts is based on the expected future income from natural capital; the future resource rents. 2.2 Two kinds of resources When discussing different types of natural resources, it is important to separate resources that can naturally regenerate themselves from those that cannot do so. That is because, if a resource has the ability to regenerate, the stock can always recover to its original level as long as it is not driven to extinction. Those kinds of resources that do not have this ability need to be approached in another way, because sooner or later the stock will be depleted and will no longer be available for usage. Because of this major difference, natural resources are usually divided into two different main types of resources, based on their capacity to be regenerated or not, and these will be explained below Renewable resources Resources that can regenerate naturally in a human-relevant amount of time are called renewable resources, and they can be divided in two categories; stock resources and flow resources. Stock resources are typical biological resources such as forests or fisheries, where the stock is given in physical units. As a result of the stock resource being biotic, 6

16 the stock will in time regenerate after harvesting. In contrary to the stock resources, flow resources are intangible and non-depletable. There are thus no stocks of this kind of resource, but rather flows that can be used. Examples of flow resources are solar, wave and wind energy, and the usage of these resources today will not affect the amount available tomorrow. (Perman et al., 2011) The biological resources have the ability to renew themselves, but since it takes time for the stock to recover there can be problems if too much of the stock is harvested in a short amount of time. Overuse can therefore cause irreversible damage, which simply means that recovery of the stock is no longer possible. This could cause shortage of the resource for a very long time and lead to no or extremely little harvesting. To avoid irreversible damage, it is therefore necessary to harvest the resource carefully. (Beltratti et al., 1998) Perman et al. (2011) mention the concept steady-state harvests, which they explain as a constant and sustainable amount being harvested each time period. The stock could attain, e.g., a steady-state harvest level called maximum sustainable yield, where the amount harvested is the highest annual harvest that can be maintained indefinitely, or the maximum economic yield, the most profitable annual harvest that can be maintained indefinitely. Perman et al. (2011) also write that is important to remember that this is a theoretic model; in reality the steady state is never fully stable because conditions are always changing. This simply means that this model could be seen as a guideline to sustainable harvesting and steady state should instead be seen as a future vision. Timber is one of Sweden s more important resources, and it is also renewable. All trees are not available to be felled as timber products, the trees can for example be standing in protected areas or be in difficult areas where it is not economic to operate. In the SEEA framework, there are accounts for physical and monetary units separately. Both the economically useful available timber and the not economically useful or available timber is retained in the physical accounts for timber resources in the SEEA framework and fulfil the definition of environmental asset. However, it is only the timber that has an economic value and is available for wood supply that is included in the monetary accounts. (United Nations, 2014) 7

17 For timber resources the physical asset account records the volume of timber at the beginning/starting point of an accounting period and at the end of the same period, and the changes in the stock during that time period. Timber is a renewable resource and because of that the natural growth compared to the removals of timber is of interest. The increase due to natural growth is measured in terms of gross annual increment. The timber asset can be reduced due to removals, felling, fire or other natural or catastrophic losses. The volume of timber resources that can be harvested in a sustainable way will be a function of the growing stock account with both the expected natural growth and natural losses of trees. (Ibid) The measured value of the stock of timber resources at the beginning and the end of a time period and the changes during that time is the monetary asset accounts for timber. The monetary asset accounts can change due to either changes in the physical asset or because of changes in the timber price during the accounting time period. For valuing the stock of timber resources the United Nation recommends what it calls the NPV method, which will be explained in chapter three. (Ibid) Non-renewable resources Non-renewable resources are defined by Perman et al. (2011) as a fixed stock of resources that has been formed by geological processes over a very long time and that, unlike renewable resources, cannot be regenerated after extraction. Examples of non-renewable resources are and fossil fuels like oil, gas and coal, but also minerals, such as copper and iron ore. Iron ore is an important resource for Sweden; the industry employs many people and has an important economic value for the country. Mineral resources are non-renewable which makes it of special interest to understand the rate at which this asset is extracted and depleted, as well as the sustainability and availability of the asset. Central parts of the asset accounts are flows of extraction, depletion and discoveries. (United Nations, 2014) The physical asset account for iron ore should include both the opening and closing stock and changes in the stock over the time period, where the unit of the stock is tonnes. 8

18 Changes in physical terms in the stock could be discoveries, reappraisals or extraction. For minerals, the asset accounts in monetary terms depend on the availability of information on the physical stock of the resource. Changes in monetary terms depend on either changes in the prices or the assumptions underlying the net present value approaches that are used to value mineral resources. Because of the few transactions in mineral resources the net present value approaches are used for valuation and that requires an estimation of the resource rent. 2.3 The Hotelling rent If renewable resources have to be harvested in a specific pace to be able to recover the stock, the non-renewable resources must instead have an optimal extraction plan. One way to look at the problem of using finite resources is with the Hotelling model. The main purpose of this model is to find out how an owner of an exhaustible resource can maximize profits while the resource is depleted (Hotelling, 1931). This model states that the extraction and net prices, which is the price after all costs and discounts have been deducted (SEEA, 2014), over time should correspond to social welfare maximization (Perman et al., 2011) and should therefore apply to a competitive market. The model shows that the net price should increase while the stock is getting smaller, which means that the extraction declines for each time period. When the extraction is reduced, the supply naturally also declines which makes the price increase with an increasing demand. Although finite resources cannot be recreated and there is a possibility to deplete them, Hotelling (1931) says in his article that the time it takes to deplete the resource can vary depending on the market interest rate. Because of the assumption that the mine owner always wants to maximize profits, the rate of depletion might not be constant. A mine owner who has all of the capital in the ground faces two options: extracting and selling the asset and investing the money in some other asset, or keeping the asset in the ground. The first option is a good strategy if some other asset gives a higher return with the same amount of risk. Keeping the natural asset in the ground will be the best option if this yields a return higher than the return on the capital that has been invested in other assets; thus, 9

19 it must yield a rent, if not then the asset will not have any economic value. Hotelling showed that at the margin, the profit from extracting and selling one unit of the resource and the profit from leaving that unit in the ground and letting it increase in value should be equal. (Lindmark, 1998) Hotelling said that because of this, the price of an extracted scarce natural resource will not be equal to the marginal extraction cost. The price of a scarce resource in this case will also include a rent, the so-called Hotelling rent. (Ibid) The Hotelling rent can be expressed like this: R = P MC Where R is the Hotelling rent, P is the final price and MC is the marginal extraction cost (Lindmark, 1998). If a non-renewable resource is extracted in the most profitable manner, the resource rent from the last extracted unit in each future time period, discounted to the present day, will be equal. We will have P P1 MC (1 r) P2 MC 2 (1 r) P3 MC 3 (1 r) MC Resource rent The total economic profit that comes from a resource is defined as the resource rent. This rent is the total revenue being generated by the resource after all costs, like extraction costs, and normal returns to capital have been taken into account. (Campbell & Haynes, 1990) The rent is used to determine the value of economic assets and is used in the SEEA as well. SEEA mentions three possible ways to estimate the resource rent: the residual value method, the appropriation method and the access price method. The most commonly used method is the residual value method, which is explained below. 10

20 2.4.1 The residual value method This is the most commonly used method used, and the estimation is described by the SEEA report (2012) as [ ] deducting user costs of produced assets from gross operating surplus after adjustment for any specific subsidies and taxes. (p. 152) To be able to estimate the resource rent in this case, some values need to be estimated first. Values like gross operating surplus, subsidies, taxes and user costs of produced assets are to be found in the national accounts. The user costs of produced assets consist of two different variables, the consumption of fixed capital of produced assets and normal return on produced assets, which can be collected from within the national accounts models for such values. (SEEA 2014) One challenge when estimating the rent using this method is the difficulty of capturing the extraction or harvesting activity alone, rather than in combination with e.g. processing, and that sometimes more than one resource is extracted at the same time so that it is difficult to differentiate the rents from different resources from each other. Also, the average cost (which is easier to measure) is more frequently used instead of the marginal cost, but this gives an inaccurate number of the gross operating surplus that will lead to a higher estimate of the resource rents than actually can be sustained, and that is not what is wanted in the long term. 2.5 Theory discussion Since the SEEA framework constitutes the basis of this thesis, naturally the majority of the theory used will be about the SEEA central framework. More information about the SEEA follows in chapter three and a discussion of how the SEEA methods are used in this thesis follows in chapter four. The resource rent is a central part of valuation of resources and therefore the theory behind it is important. We choose to explain the main difference between renewable and non-renewable resources to get a deeper understanding why these two have to be seen through different perspectives. The Hotelling rent, which is what the net price method is based on, and the steady-state harvesting method are 11

21 complements to the resource sections to explain more of the background theory of how to harvest/exhaust in a sustainable and long term way. 12

22 CHAPTER 3 INTRODUCTION TO THE SYSTEM OF ENVIRONMENTAL ECONOMIC ACCOUNTING This chapter aims to give an understanding of the concept of SEEA and what it actually is. It will also cover the system of national accounts, the previous research about valuation methods for natural resources, an explanation of the method used in the SEEA for valuation and the variables in it. Discussion of previous literature about valuation of natural resources are also included here. 3.1 The System of National Accounts (SNA) The System of National Accounts, SNA, is an international standard established by the European Communities, International Monetary Fund, Organisation for Economic Cooperation and Development, United Nations and World Bank for how to measure economic activity; it is a universal guide for national accounts. The SNA is a statistical framework that was first established as a statistical standard in 1953 and has subsequently been updated; the version in use now is from SNA is set up so that it easily can be used together with other international statistical standards. This framework is used to compile economic data for economic analysis, policymaking and for decision-taking, which is the main objective for SNA. Information about the economy can be used for international comparisons, macroeconomic analysis and monitoring the behaviour of the economy. The production of goods and services is the main focus in the SNA. (European Communities et al., 2009) The SEEA central framework from 2012 is based on the SNA from The SEEA central framework is a complement to the SNA, which is inadequate on its own for dealing with the environment and natural resources. The SEEA applies the SNA accounting concepts, rules, structures and principles. (United Nations, 2014) 13

23 3.2 Introduction to SEEA SEEA is an international standard for environmental-economic accounting. It is a framework for understanding and describing stocks and changes in stocks of environmental assets and interactions between economy and environment. The principles and accounting concepts from the System of National Accounts (SNA) are utilized in the SEEA Central Framework. The whole framework covers information and detailed measurement approaches for water, minerals, timber, land, fish, soil, ecosystem, consumption, accumulation, production, waste and pollution. It should be possible for countries all over the world to use the SEEA Central Framework, regardless of their economic structure and level of development. (United Nations, 2014) The work on environmental accounting started with a report from 1987, Our Common Future from the Brundtland Commission. The report focused on the links between environmental capacity and economic and social development and it aroused the interest around the world for this important topic. The United Nations published the first SEEA report 1993 in response to this, Handbook of National Accounting: Integrated Environmental and Economic Accounting. The discussions were not finished at this time and this first handbook was an interim version. In 2003, an updated version of the SEEA report from United Nations were released, Handbook of National Accounting: Integrated Environmental and Economic Accounting 2003, with more developed methods, different methodological options and many country examples showing varying country practices. The recommended valuation method for natural resources in these early handbooks is the net price method, which is explained and studied in this thesis. (Ibid) The current SEEA framework, System of Environmental-Economic Accounting: Central Framework, came in This SEEA Central Framework is based on over 20 years of development of environmental accounting (p. preface C XII) and is now an international statistical standard, which was one of the aims of the second revision. The second revision is updated in many ways and now also covers the measurement of degradation, and valuation of this, which was not covered in the earlier version from Furthermore, the Applications and Extensions section is developed and describes how SEEA data can be used to inform policy analysis. The recommended valuation method in this current SEEA framework is the net present value method, which also is explained and evaluated 14

24 in this thesis, and not the net price method as in the earlier ones. The SEEA Central Framework is relevant in many ways for decision-making, policy development and policy evaluation. The summaries and the detailed information in the framework are useful for a deeper understanding of the related policy issues because the explanations of changes in the environment. The data can be used for different policy scenarios at a local, regional, national or global level. Three main areas are covered in the SEEA Central Framework; these are the economic activity and transactions related to the environment, the stocks of environmental assets and changes in these stocks, and physical flows of materials and energy in the environment and economy. (Ibid) 3.3 Previous literature It has been quite problematic to find relevant previous literature for this thesis. This is most probably, as mentioned earlier, a result of the lack of other valuation methods than the ones used in the SEEA central framework. The SEEA international standard is the only framework that has been used for valuation of natural resources within green accounting. The NPV method is the method of today in SEEA; earlier it was the net price method. Due to this fact, our focus has been on finding articles and reports that mention national accounts and natural resources to follow the discussions made about those subjects, and perhaps even find something that has criticized the SEEA method in some way. Accounts overdue: natural resource depreciation in Costa Rica Solórzano et al. (1991) This book is about the overuse of natural resources in Costa Rica and how the SNA did not show any negative results despite that overuse. The authors write that at the same time that Costa Rica s natural resources were being depleted and soon to be exhausted, the SNA showed a positive result in the accounts and thereby created an illusion of income development. They write about SNA as an accounting method which completely ignores the natural resources importance for a country and also makes using as much of the resources as possible seem like an entirely positive outcome, as only the increased income from this is measured. 15

25 It is also stated in this book that if Costa Rica would have created national balance sheets that included its natural resources in 1970 and then again in 1989, the outcome would have been that natural resources valued at more than one year s GDP had disappeared. Thus, the reality did not match what was stated in the SNA accounts. This report points out the exact reason why green accounting is important for the environment. If SNA treats depletion of natural resources only as income generation, there is obviously a problem for the future since there will not be any resources left to use. Thus, it is important to show the cost of using natural resources to increase income. Green accounting and economic policy Salah El Serafy (1997) The SNA was revised in 1993 for the first time since The revised version came with proposals of certain satellite accounts, which are accounts that allow focus on specific fields in the context of national accounts, made for the environment. This paper accuses the satellite accounts of being unnecessarily complex and unclear. El Serafy writes in the paper that SNA focuses far more on the economic parts than the environmental changes, and is therefore much more useful for economic policy than for environmental policy. The purpose of this paper is to explain why the author believed that the revised SNA version in 1993 is still not good enough to capture environmental changes. The conclusion is that green accounting only can ensure income, or as the writer calls it weak, sustainability, but that what is needed is ecological, or strong, sustainability. This study aims criticism against the SNA report from 1993, and argues for why the environmental changes should have a greater impact in the accounting system. Reports like this one might have developed SNA even more and even the SEEA, which focuses entirely on green accounting, to let the environmental parts be of more importance than before. From this we can tell that SNA and the early versions of SEEA were obviously not optimal for environmental accounting, and that green accounting had to be developed further. 16

26 For this thesis, it is of interest to find such criticisms of the SNA and SEEA because the discussions must have led towards development and even thoughts about alternative valuation methods. Nordiska historiska nationalräkenskaper: Miljöjusterade historiska nationalräkenskaper - Magnus Lindmark (1994) This paper describes how researchers in Sweden began to develop environmentally adjusted historical national accounts in the 90 s. This article provides a good background to this study and shows how the valuation of natural resources in Sweden first occurred in a national accounting context. The purpose of this paper is to discuss the methodological problems arising from the valuation of natural resources in environmentally adjusted historical national accounts, MHNR (Miljöjusterade Historiska Nationalräkenskaper). This study uses iron ore production in Sweden as a pilot case, both because iron ore is a non-renewable resource and because the availability of data of iron ore supplies from as early as the 19 th century, which gives a relatively long time period to study. At the time this study was conducted, the process of finalizing the SEEA framework from United Nations was not yet finished. This means that in this paper the unfinished SEEA framework is used as a starting point to see what MHNR might look like for mining. It is clear that MHNR can be developed further when the final SEEA is published. The statistics used for calculating the historical values of the iron ore mines come from various sources, some better than others, and this article both explains them and describes their weaknesses. The article also explains how the different variables relate to each other in the calculations, which factors should be taken into account in calculations of the valuations of natural resources, and how the physical quantity of iron ore can be converted into monetary terms. The conclusion of this study is that there will always be different opinions on how to execute the monetary accounting, and then the MNHR should be constructed accordingly. 17

27 Accounting for the benefits of forest resources: concepts and experience - Jeffrey R. Vincent & John M. Hartwick (1998) Vincent and Hartwick (1998) studied alternative ways of valuing forest resources. They write in their paper that the GDP measure is not a fair measure of economic welfare since it does not include all economic activities. They also mention that the exclusion of those activities helps the SNA to reach their purpose, which is to produce precise information about any country s production activities. One of the things that the SNA does not measure correctly, according to the authors, is the value of forests. They argue that forests can have other values than just being resources for production. They also contain a recreational value to some people who enjoys the forests the way they are. The authors say that their report confirms the main purpose of the United Nation s SEEA report, which is that environmental non-market values and depletion should be included in the national accounts. In their study, they have calculated an adjusted GDP to visualize the real economic contribution of forest resources which cannot be seen in the ordinary GDP measure because of the simple ways used to value forests within the SNA model. The SNA balance sheets are said in the report to contain mainly three entries, and these are: opening value of asset, net accumulation and closing value of asset. The authors argue that much information about the real value of the forest resources is excluded in the SNA report when not taking more factors into account than the pure monetary value. They also say that the United Nation s SEEA report is more detailed in its valuation of natural resources and is more likely to give a fair result of the valuation. The main difference between the method used in this report and the one in SEEA is that this one does not fully stay within the SNA production boundary, and that it uses valuation methods based on benefits while the SEEA model is a cost based valuation method. The conclusion of this report is that the methods used here should not be seen as competing with the SEEA/SNA model, but rather as a valuation system with a different purpose. 18

28 This report is one of the few that suggest another way of valuing natural resources (in this case forests) than the commonly used SEEA model. Even though this report is 19 years old, it is thus one of few that questions the way SEEA values natural resources. Mineral depletion, with special reference to petroleum - M. A. Adelman (1990) In this paper the author states that there is no such thing as a fixed stock when it comes to exhaustible natural resources. What the author means by this is that we can never know exactly how much minerals the earth contains, and if the costs of extracting exceed the revenues the industry will die and the minerals will stay underground and will thereby not be a source of income. The author says that the costs and revenues are what determine the amount of minerals that will be extracted, and when larger reserves are found, they will be extracted until the marginal costs are too high to keep extracting and then the depletion will stop. In other words, the mineral will not be extracted until it is totally depleted but rather until the costs are too high to keep extracting. This report shows another way to look at non-renewable resources and criticizes the assumption of fixed stocks. It also gives more information about mineral depletion and the optimal way of extracting based on costs and revenues. This is important to take into account when valuing natural resources in form of minerals. Alternative methods for estimating resource rent and depletion cost: the case of Argentina s YPF - George D Santopietro (1998) This paper summarizes many different methods of how to value resource rents and gives a good background to the valuation methods of today. One recurring problem when extracting a non-renewable resource is to extract it in a sustainable way. There are two ways to manage the resource sustainably, since extraction enriches the generations of today but reduces the possibilities to extract for future generations: one way is to not extract the resource at all and the other way of sustainable extraction is to compensate future generations for the depletion of the stock. 19

29 It is difficult to account for depletion of the natural resources and during the 90 s it was a well-debated question how to measure the cost. Production cost and resource rent gives the theoretical price for depleting resources, but in practice it is very difficult to find the value of resource rents. This paper gives a review of various methods for measuring the surplus revenue accruing to the owners of the resource, which is the usual method for estimating resource rents. The paper summarizes and describes many different methods from different studies and uses them to estimate resource rents and depletion cost of Argentina s petroleum reserves with data used from Argentina s state-owned oil enterprise (YPF). The results from the study show that the net price method and transaction method overvalue the resource rent of petroleum reserves in Argentina Literature discussion The literature discussed here mostly consists of reports that discuss natural resources or how to account for natural resources. These reports and papers introduce what the problem of valuing natural resources is and also that the need for a sustainable valuation model is important for future generations. The literature covers renewable and nonrenewable resources, resource rents and SEEA. All of these expressions are both to be used and have previously been explained in this thesis and are, because of that, highly relevant for this study. We feel that we have gained further knowledge and understanding about the problems with valuation of natural resources and how people s opinions vary about how to execute these. To broaden this section, it would also have been of interest to find articles that directly criticize the SEEA model. However, we found it difficult to find relevant articles and studies about the SEEA, maybe because of the overall satisfaction that seems to have settled in after the United Nations presented it but also because it is a relatively narrow area to study. Most of the criticism we could find was aimed towards the GDP measure per se, but not directly at the SEEA. Because of this, we have chosen to use previous literature written prior to when the SEEA was released. 20

30 Our study will aim to test the reliability of the SEEA model, and test if the method is good enough for valuation of natural resources in Sweden (in this case: iron ore and timber), a former method will also be tested to compare with the method of today. 3.4 Valuation methods for natural resources Making valuation of natural resources is indeed important, but there are different ways to implement them. All valuation methods aim to estimate the correct value which can never be known in advance. The United Nations recommended what it calls the NPV method (Domingo & Lopez-Dee, 2007) as the best way, but there are other methods that previously have been discussed and used as possible alternatives. The net price method is one of them and is the second method, together with the NPV method, that this thesis will evaluate. The formula for the correct value (the actual NPV) is: Actual NPV = [RR 1 + RR 2 (1 + r 2 ) + RR 3 (1 + r 2 )(1 + r 3 ) + + RR t (1 + r 2 )(1 + r 3 ) (1 + r t ) ] Where RR is the actual total resource rent each year, r is the discount rate (CRI for each year) and t is the chosen time period, ideally the entire time period during which the resource is extracted. The correct value can never be calculated in advance, but the net price method and NPV method both aim to estimate what the actual NPV will be. In retrospect, the actual NPV can be used to compare the results from the net price estimate and estimated NPV to see which one of those methods that is a better match with the actual NPV. In this section, we will discuss three methods with different approaches towards valuation that we find interesting, two which have been brought up as alternative ways to value natural resources and also the most recent recommended NPV method. 21

31 3.4.1 The net price method This method is based on the Hotelling rent model, which states that in a market where there is perfect competition the resource rent for non-renewable resources will increase at the same rate as the discount rate when the resource is becoming scarce. In this method, there is no need to predict future income since the resource rent will rise with time at a rate given by the discount rate, such that the discounted resource rent per unit will be the same regardless of when that unit is extracted. The NPV is then given by NPV = [RR 1 + RR 2 (1 + r 2 ) + RR 3 (1 + r 2 )(1 + r 3 ) + + RR t (1 + r 2 )(1 + r 3 ) (1 + r t ) ] = [ RR 1 RR 2 q q q 2 (1 + r 2 ) q RR q 3 (1 + r 2 )(1 + r 3 ) q RR t q i (1 + r 2 )(1 + r 3 ) (1 + r t ) q i] = [ RR 1 q 1 q 1 + RR 1 q 1 q 2 + RR 1 q 1 q RR 1 q 1 q i ] = RR 1 q 1 [q 1 + q 2 + q q i ] Where qi is the amount extracted in year i and where the sum of all qis will be the total economically available stock, Q. This gives us NPV = RR 1 q 1 x Q Where RR1/q1 is the resource rent per unit in year 1 and Q is the stock quantity. Using this method, calculating the resource stock value can thus be done by taking the current rent per unit of the resource times the stock size. Obviously, it is then required to know the stock size which could be difficult when looking at resources like ore or oil, because of the possibility of making new discoveries. There are some problems with using this method. For example, the assumption of a perfectly competitive market with optimal extraction may not hold in reality since the market situation is constantly changing. This may thus lead to an incorrect rent estimate, which may in turn lead to incorrect calculations in the valuation. Another important factor to take into account is that the world mineral prices are not governed by perfect 22

32 competition, which again makes this method difficult to apply in reality. (Domingo & Lopez-Dee, 2007) El Serafy method (User cost method) This method has its main focus on the depreciation of an asset, and calculates this based on user cost theory (Seroa da Motta, 1998). The method puts rents (RR), which for simplicity are assumed to be constant over time, earned by an asset equal to an infinite annuity (x). With a constant discount rate (r) (Domingo & Lopez-Dee, 2007), the formula for calculating the depreciation will be given by: RR x = RR[ 1 (1 + r) n+1 ] Where RR x shows the depreciation. (Seroa da Motta, 1998) The main problem with using this method is that there are a lot of assumptions needed to make the method useful, which makes it difficult to make reliable valuations. (Domingo & Lopez-Dee, 2007) Net present value (NPV) method This method is the one recommended today in the SEEA (and SNA) for valuing stocks of natural resources. It aims to estimate an asset s net income during its whole lifetime. The valuation is made by predicting all the future net income from the resource, and then discounting the income by using a suitable discount rate. (Domingo & Lopez-Dee, 2007) N t RR t+τ NPV = (1 + r t ) τ τ=1 NPV is the estimated net present value of the asset, N is the asset life, RR is the resource rent and r is the discount rate. 23